5Questions About the Supreme Court Action in Argentina Debt Case

The U.S. Supreme Court on Monday weighed in on a 13-year dispute between Argentina and investors who own the country’s defaulted bonds, and essentially sided with the bondholders. Here’s a primer for those who haven’t been following the case.

16 Jun 2014 4:16pm

By

Mike Cherney

1What is at the center of the dispute?

In 2001, Argentina defaulted on its sovereign debt and declared a moratorium on repaying more than $80 billion in outstanding bonds. In 2005 and again in 2010, it offered current bondholders new debt that was worth about 30 cents on the dollar. Ultimately, investors holding about 93% of Argentina’s old bonds agreed, but some investors refused the swap, hoping to get a better deal at a later date. Argentina has not made payments on its old bonds since 2001, though it has been making payments on its new bonds.

Associated Press

2How did the dispute reach the Supreme Court?

Many of the old bonds were issued under New York law. So investment firms including NML Capital Ltd. and Olifant Fund Ltd., which own the old bonds, sued Argentina in federal court in the Southern District of New York, which held that Argentina must make payments on its old bonds if it is making payments on its new bonds. The ruling was appealed to the U.S. Court of Appeals for the Second Circuit, which said the lower court’s ruling was “basically OK, but had a few issues,” said Henry Weisburg, a partner and international litigator with law firm Shearman & Sterling LLP.

The case was sent back to the lower court, which said Argentina would have to pay more than $1.3 billion to the investment firms when it next makes an interest payment on the new bonds. Argentina appealed the case again to the Second Circuit, which affirmed the lower court’s ruling, and Argentina then made the appeal to the Supreme Court.

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3What did the Supreme Court decide today?

The Supreme Court decided not to hear the case, allowing the lower court’s ruling to stand that Argentina must pay its old bonds if it pays its new bonds. In a separate but related case, the Supreme Court ruled that Argentina’s bank records could be made available to NML.

Bloomberg News

4What impact will today’s decision have on bond markets?

Argentina’s bonds maturing in 2033, which are affected by the decision, are down nearly 10% today. Even debt that falls under Argentine law is down. But Mr. Weisburg said the case might have a muted impact on bonds outside Argentina because Argentina’s situation is so unique. “It’s going to be very rare that somebody gets themselves into this situation,” he said. “This is, at least for the time being, an Argentina rule.”

10%
The percent Argentina’s bonds maturing in 2033 are down Monday

5What happens next in the case?

Argentina can ask the Supreme Court to reconsider its decision not to hear the case, “but those are granted like once a century,” Mr. Weisburg said. “Roughly speaking, this moves out of being a judicial matter and becomes a political and financial matter.” Argentina’s next bond payment date is June 30, and if no payment is made, it has 30 days before the bonds are considered to be in default.